Connecticut banks among the stingiest with interest rates

Rob Varnon

Published 8:59 pm, Thursday, January 31, 2013

In a dismal rate environment for savers, it's no surprise Connecticut banks rank among the worst in the nation when it comes to the interest rates being offered on savings accounts, experts say.

This week, California-based GoBankingRates.com, ranked the states by the average interest rate on savings account. Connecticut's average of 0.15 percent put the Nutmeg State at 45th. The highest average interest rate wasn't much better at 0.34 percent in Oklahoma.

Banks seemed averse to discussing the savings rate issue, with People's United not responding to requests for comment, First County in Stamford declining to comment and Webster Bank also failing to comment.

Phil Lane, Fairfield University associate professor of economics, was not surprised to hear Connecticut ranked near the bottom for savings account interest rates in the study.

"Our folks don't put a lot in savings," he said.

Connecticut is home to a large population of financially sophisticated people and they're not putting money into a savings account, they're investing or using money market accounts, which provide better returns, but require more capital, he said.

Connecticut's largest banks offer much lower rates than the average, including People's United and Webster Financial, both at 0.02 percent. Middletown-based Liberty Bank, which has an account that pays 0.25 percent, offers among the highest rates in the state.

Lane said a number of factors are affecting this staple of the banking industry, including federal monetary policy and a local economy that has affected the middle class.

Middle class families have typically favored savings accounts over the years, but Connecticut's middle class has been hollowed out during the recession, with job losses in construction, manufacturing and many middle-management positions.

That leaves a smaller market, according to Lane, who said older Americans, who like the liquidity of the savings account and the safety of Federal Deposit Insurance Corp., are the clients who tend to favor a traditional savings account.

But Lane said even if there were more competition for these accounts, the current interest rate environment would not allow much upward movement.

The Federal Reserve has kept its key overnight lending interest rate, the rate the federal body charges banks for loans, at nearly zero, which in turn has kept interest rates on mortgages and other loans at historic lows. In effect, it has squeezed the profit margin on loans and reduced what banks can pay on accounts, Lane said.

"The consumer isn't generating much income from their savings," he said. "It is forcing some consumers to look at things that are a little more risky, like mutual funds."

He said most investment professionals don't see much risk in mutual funds, but for some people, it's a foreign idea and something that makes them uncomfortable.

The longer this low-interest environment hangs on, Lane noted, the more likely families will take on more debt.

One of the things savings accounts were used for was to build up cash for a large purchase, but with rates lower than inflation, it could take years to build up enough cash for a car purchase or other type of expenditure.

Lane said this means people will rely more on credit.

Casey Bond, managing editor and author of the interest rate rankings for Go Banking Rates, said the rate environment in every state is challenging and Connecticut is affected by the overall performance of the local economy as banks attempt to reduce risk and don't need to grow deposits.

"In 2012, Connecticut had a pretty rough housing market and the unemployment rate was higher than the national average," she said, which indicates Connecticut is still struggling.

So banks are less likely to compete for savings accounts.

It's not a perfect correlation.

Rhode Island has the second best rates in the nation with 0.34 percent, but it has an unemployment rate of 10.2 percent, which is higher than Connecticut's 8.6 percent.

Bond agreed with Lane that having a significant number of wealthy people in the state can also reduce demand for this product and having a large number of big banks in the market can also affect the rate.

"Generally, the larger the bank, the lower their interest rates," she said.

But Bond said there's really not much difference between the state with the best rates and that with the worst.

She said it's tough all over on savers, but people have to look at options. There are CDs and other accounts and products that can be used to save and make interest income on, she said. What you have to know is what your timeline for using the money will be, she said.

And for savers who really like the liquidity of an account, she said, smaller banks and credit unions tend to offer better rates. In Connecticut several credit unions were offering between 0.05 and 0.25 percent. Norwalk Hospital's credit union had a rate of 0.15 percent for a basic savings account. Smaller banks, like Savings Bank of Danbury also offered better rates. And many banks offer tiered rates, which increase the more you save.

"There are benefits to using a savings account, in terms of shoving it under the mattress," Bond said. "There's safety, for one."